Italy’s deal on electoral reform rocks the boat, says Barclays’ Fois

Renzi-Berlusconi deal on electoral reform rocks the boat, but benefit to political stability likely to be modest in the near term, says Barclays southern European economist Fabio Fois.

Electoral law reform takes the centre-stage
Over the weekend, Democratic Party (PD) Secretary Matteo Renzi met with Forza Italia leader Silvio Berlusconi in an attempt to strike a deal over a new electoral law and a comprehensive reform of the Senate.
According to various newspapers, including La Repubblica, Il Sole 24 Ore and Il Corriere della Sera, the meeting raised tensions within the coalition government.

Junior coalition member New Center Right (NCD) party and some PD members reportedly said they would withdraw their support and bring down the government if Renzi reaches a deal with Berlusconi without involving other coalition government partners.

However, according to Il Corriere della Sera, the NCD party recently softened its stance as the electoral reform may not penalize small political parties excessively.
PD Secretary Renzi will present the details of the reform to senior PD party members on Monday 20 January.

Our preliminary view: better, but…
We welcome the reform blueprint. If fully approved, it could help to improve political stability in Italy following elections.
The new system would facilitate the appointment of a more cohesive parliament, while also supporting smooth approval/implementation of legislation pieces.

We also think it is very important that electoral reform be accompanied by a comprehensive reform of the Senate. Italy should overcome its (almost) perfect bicameralism where both chambers vote the same legislation pieces, including government confidence.

According to the Italian Constitution, the Senate block voting system is regional as opposed to the lower chamber, which is nationwide. This can lead to indecisive electoral results in the Senate, and hence to a hung Parliament (as was the case with last year’s general elections).

However, we think the Renzi-Berlusconi deal is unlikely to improve political stability in the short term. Until a comprehensive reform of the Senate is completed, the new voting system as it has been leaked by various newspapers (more on this below) may not be sufficient to remove the risk of post-election political paralysis following snap elections.

The constitutional reform process needed to reform the Senate will take at least six to nine months to be completed.
We have not changed our forecast and continue to expect general elections in mid-2015. Risks of snap elections this year remain low, but their potential to unsettle market sentiment is strong, as the approval of the new voting system is unlikely to guarantee post-election political stability until the reform of the Senate is also completed.

The draft proposal
The two leaders reportedly reached agreement on general principles to reform the electoral system. According to Il Corriere della Sera, they negotiated a proportional representation electoral system similar to the one used in Spain.

Parliament seats won by a party or group of candidates would be proportionate to the number of votes received, while the block voting system would be nationwide and divided into small constituencies.

The system would also include specific features to minimise risks of post-election paralysis, including the introduction of minimum electoral thresholds and a majority premium. This should reduce the proliferation of small political parties and guarantee that the party receiving the most votes wins outright majority in parliament even if it does not secure 51% of the votes at national level.

The minimum share of vote required to secure any parliamentary representation would be 4-5% for coalition parties and 8% for single parties. Meanwhile, provided that the party/coalition receiving the most votes wins at least 35% of the total votes, the electoral system would award it a majority premium of 20%. If no coalition meets the 35% threshold, the majority premium would be spread proportionally across the parties meeting the threshold for parliamentary representation.
Finally, Renzi and Berlusconi reportedly agreed to eliminate the Senate’s legislative power.

Fragile political equilibrium subject to downside risks
Political instability could resurface, given that the grand coalition may not have sufficient political capital to push through much needed deep structural reforms.

Ongoing friction between newly elected PD Secretary Renzi and the leader of the junior coalition party NCD, Angelino Alfano (as well as some conservative senior PD party members) does not bode well for the smooth implementation of much-needed structural reforms and, more broadly, political stability.

For this reason, we think the parliament should, at a minimum, expedite the approval of an efficient electoral law reform to minimize the risk of a political impasse if political tensions within the current grand coalition government intensify and bring down the government.

Temporary current electoral law possibly more inefficient that the old law
As we wrote in Italy: New elections, same old uncertainty, 10 April 2013, reforming the electoral system is extremely important. The risk of a post-electoral political paralysis is still substantial and actually possibly higher than before.

At the end of last year, the Italian Constitutional Court ruled that the electoral law approved in 2005 is unconstitutional due to its provisions which granted a majority premium to the winners of lower chamber elections without requiring a minimum share of the total vote to secure parliamentary representation.

If parliament does not reform the voting system, snap elections would be held under a de facto proportional voting system (with no majority premium and the two chambers of parliament using different block voting systems), which in our view would result in a high risk of inconclusive elections.

Latest electoral polls
Latest electoral polls do not bode well for post-election political stability (even under the new proposed electoral system), as they indicate that a three-party political order (PD-FI-5SM) remains in place.

According to various polls, a centre-right coalition (FI+NCD+NL+others) would secure 34.6% of votes (on average), a centre-left coalition (PD+SEL+others) would receive 35.8%, while 5SM would have about 21% of votes. While a post-election coalition is always a possibility, we believe a cohesive coalition government agreed to before the elections has more chances of implementing structural reforms.

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